What is CAS Compliance?
Compliance with the Cost Accounting Standards (CAS) refers to the need for certain government contractors to adhere to a selection of cost accounting standards when they bill their work to the Department of Defense (DoD) and NASA. These costs are reported using specific criteria in terms of indirect labor, direct labor, labor overhead, and other general administrative costs that must be allocated appropriately. The CAS compliance requirements don’t require adherence to any specific method of accounting methods in terms of direct and indirect costs. Instead, they simply require contractors to adhere to the method of accounting that they reported in their disclosure statements to the government . It’s the responsibility of the contractors to adequately document and produce supporting documentation for all proposed pricing and claims based on those disclosures and a noncompliance by the contractor could result in damages against the company. CAS regulations have been in place since 1968 following the promulgation of the Truth in Negotiations Act (TINA), which states that every "contractor," including subcontractors, must comply with a selection of supplemental standards under Subpart 9903.2 as well as another 10 Subpart 9903.3 cost accounting standards. Generally speaking, covered contractors include: The general rules when it comes to CAS compliance are that a contractor must always comply with whatever method of transactions it includes in its disclosure statement. This includes the following: Contractors have to implement compliance, in effect, by statute, by the moment they enter into contracts that are subject to TINA.
Who is Required to Comply with CAS?
The following thresholds apply, and must be followed when determining which contractors and subcontractors are subject to CAS compliance: Any contractor or subcontractor that has contracts of $2 million or more with the federal government, or any agency or department of the federal government, must comply with CAS. Any contractor or subcontractor with more than 300 employees must comply with CAS if any contract exceeds $7.5 million, or $5.5 million for commercial item contracts. However, different rules apply to defense contracts.
Department of Defense contractors or subcontractors awarded contracts in excess of $7.5 million will need to comply with CAS if they have at least 500 employees. If they have at least 300 employees, their contract must exceed $2 million to require compliance with CAS. Department of Defense contractors or subcontractors awarded contracts for $15 million or more must comply with CAS if they have contracts for more than $7.5 million. The various thresholds also depend on certain exemptions, including subcontracts, do not apply to grants (including those awarded by the National Aeronautics and Space Administration), firm-fixed-price contracts not exceeding the simplified acquisition threshold, and contracts with educational institutions and state or local governments.
Key Components of the CAS Regulations
CAS regulations contain the following five key elements: CAS 401: Consistency in Estimating, Accumulating, and Reporting Costs. Generally CAS 401 requires a contractor to estimate, accumulate, and report costs in a consistent manner. When a business unit proposes to change its cost accounting practices, that change must be approved by the cognizant contracting officer and, when applicable, an equitable adjustment must be made to any contracts affected by the change, because a unilateral change by a contractor to its cost accounting practices will affect contract costs. CAS 402: Consistency in Allocating Direct and Indirect Costs. Generally CAS 402 requires a contractor to consistently measure, assign, and allocate its costs to its final cost objectives. Like CAS 401, CAS 402 changes are governed by the cognizant contracting officer conditioned on the existence of an equitable adjustment. CAS 403: Consistency in Allocating Costs Incurred in Like Circumstances. CAS 403 requires contractors to consistently follow its established practices in allocating its indirect costs to its final cost objectives. CAS 404: Cost Accounting Standards. CAS 404 requirements are limited to defining two things: (1) direct, (2) indirect, and (3) joint costs. CAS 404, along with the other four CAS regulations, apply to a contractor with a CAS covered contract, but CAS 404 itself does not require the contractor to bilaterally agree to comply with the CAS. CAS 405: Cost Accounting Standard Educational Institution. CAS 405 regulates the cost accounting practices of educational institutions and their affiliates.
How to Achieve CAS Compliance
- Properly identify what CAS level is applicable to your organization. Not everyone needs to comply with CAS. Generally speaking, large contractors need to comply with CAS 410 (Cost Accounting Standards) and Contractors and Subcontractors with CAS-covered contracts of $2 million or more need to comply with some CAS Principles.
- Properly document your systems. Generally the only people that should be involved in this process are Cost Accountants, Senior Financial Reporters, Senior Managers involved in Federal Contracts and Corporate Council. Everyone plays an important part of this but the documentation of the system can only be generated in-house by the people responsible for the day-to-day functions of timekeeping, general ledger with cost allocation, billing, accounting, internally auditing and evaluating any mods.
- Provide your system to your internal auditors for their review and final check. This serves as an internal report if the auditor is competent, objective and persistent. Timekeeping is an especially sensitive area, it is common for internal auditors to get politics involved and want to avoid an issue. The fact is that without any outside, [politics free, full review] your auditor might miss something that stands out to a third party evaluator cited by the Government.
- Submit your final CAS Compliance Report to the CAS Board and the Obviously, follow up with an inquiry if you do not hear anything from the CAS Board. In general, if you have a merited system in-place and your Report indicated this, your Report will be approved [even if you don’t hear from someone]. If there is a problem with your Report, they will be in contact with you. Don’t be afraid to submit again if you don’t hear from them after 60-days.
- Be prepared for the Secretary of Defense to obtain your records and come in to audit your Government Contracts and Accounting Systems. Conducting a thorough audit takes time, and so is off-boarding an auditor from a Contractor. But this does happen – because that’s their job. If they do come to see you, cooperate and they will do their job. Getting these audits is rare as they require a level of turnover that isn’t sustainable.
- When assigned a monitor, do prepare carefully and comply with his/her findings. When this occurs it is usually a much smaller deal, as you are flagged only for certain items. Endure it and be careful about excessive chargebacks – you may just find the Department of Defense asking for money back.
Typical Pitfalls of CAS Compliance
Businesses may run into hurdles with CAS in three main areas, all of which are grounded in the same basic challenge: monitoring the performance of a contract against the requirements under the CAS system. The challenge lies in a company’s inability—or unwillingness—to absorb the cost of restructuring accounting processes, aligning them within the contract’s scope of work, and gauging the impact throughout an entire facility or business structure.
When a contract is first awarded and requires compliance with CAS, companies may experience some disruptions that may be attributed to the "newness" of the compliance systems, but more likely fall under one of these three categories:
It’s difficult to understate how costly contracting out work can be when it comes to the CAS system. Because outsourcing a contract to a third-party vendor does not absolve an established contractor from CAS compliance, in-house teams must create systems and processes to ensure that CAS requirements are fulfilled down the line as well.
With the Capstone Corporation v. United States case in 1979 , the CAS system now also extends to sub-contractors who employ fellow sub-contractors, including suppliers and vendors if they routinely receive government contracts. This "flow-through" effect means that even once the primary contractors and the immediate sub-contractors are CAS compliant, secondary and tertiary companies must also meet CAS standards if they want to do business in the industry.
Increased complexity means increased risk. As government contracts continue to grow bigger and more complicated, the compliance burden on established contractors will increase as well. A lax approach to compliance management could result in a misguided reliance on informal processes that create confusion for anyone with reporting duties.
It’s essential for a company to fully understand their CAS obligations and how posed risks might affect the entire company, regardless of where the CAS applicable work is performed.
CAS Compliance Benefits
Staying CAS compliant has numerous benefits for government contractors. First and foremost, CAS compliance facilitates – and often validates – the accurate accounting for government contracts. CAS-compliant cost accounting systems produce a true picture of cost allocations incurred in the performance of a government contract. CAS-compliant contractors tend to have more accurate contract cost closing and billing. They can track their progress to completion on internal access to project data reporting. CAS-compliant contractors are better able to evaluate whether, and when, to accept new contracts (and within what limits) when faced with multiple contract and project opportunities simultaneously.
CAS compliance also reduces the risk of costly CAS compliance breaches. Although CAS compliance requirements may seem relatively straightforward on their surface, a deeper dive will usually reveal that maintaining a CAS-compliant accounting system is a complicated and ever-changing process. CAS-compliance avoidance decisions often arise from an incomplete understanding of the rules in the context of the specific facts and circumstances. Government procurement rules are often confusing and contradictory. CAS compliance can also be difficult because government contracting requirements and interpretations are not static. Thus, a contractor who is already CAS-compliant may be at risk of losing its CAS-compliant status due to subsequent changes in government contracting requirements and interpretations. CAS-compliance failures provoke government audits. The resulting suspension or termination of contract payments can create severe cash flow problems for a government contractor. CAS-compliance violations can result in significant civil and/or criminal liabilities for a contractor, as well as permanent debarment from future government business. Maintaining CAS compliance is also critical to promoting good contractor-government relationships. CAS-compliance contractors typically have access to better government contract terms and conditions, including the ability to negotiate changes to regulatory contract clauses and terms. Government audit teams prefer to work with CAS-compliant contractors. The good regulatory track records achieved by CAS-compliant contractors can open new government doors and generate new business opportunities. Contractors should also pay attention to how CAS-compliance advantages are communicated to (and viewed by) government decision-makers who hold sway over the award of federal business contracts.
CAS Consequences for Non-Compliance
Non-compliance with the CAS can have a number of negative consequences for an entity, including financial penalties, ranging from a $750 penalty per CAS noncompliance unit to a 1 percent reduction in the contract price. Penalties are cumulative and up to 5 percent. Additional penalties may be assessed for contract fraud, other criminal activity, and repeated, deliberate or aggravated cases of CAS non-compliance.
In addition to financial penalties, a contract may be terminated for default for the failure to comply with the CAS. This could also create a false claim liability for the contractor. In instances where repeated non-compliance is determined to be willful or fraudulent, mandatory suspension and debarment may occur as well. In instances where a prime contractor has failed to comply and that contractor has subcontracted to another contractor for the performance of all or part of the work, mandatory suspension and debarment may occur. Similarly, in the case where a subcontractor is non-compliant, its status can result in the same result.
Latest Developments in CAS
Contract and Subcontracting Activity, commonly referred to as CAS, has also seen new developments. Although the CAS regulations are not yet required to be flowed down to commercial contracts, FAR Staff recently published a proposed rule recognizing that its agenda for issuing performance based acquisition regulations requires them to consult with the Small Business Administration on capital sharing. The result of the agenda item is FAR Staff’s proposed rule requiring the inclusion of a CAS coverage clause in Federal Supply Schedule (FSS) and other Multiple-Agency contracts, such as GWACs and Blanket Purchase Agreements . The proposed rule will apply only to new contracts awarded after the final rule is issued, but the proposed rule is nonetheless significant as an indicator of FAR Staff’s view that CAS coverage will not be optional in FSS contracts forever.
Additionally, FAR Staff issued an interim rule requiring the flow down of the CAS 412 and 415 cost principle requirements to CAS covered contracts and subcontracts. The interim rule is effective November 28th, 2013 and applies to solicitations and contracts awarded after the effective date.